June 13 (Bloomberg) -- The Dollar Index slid to its lowest level in almost four months on speculation the Federal Reserve won’t raise lending rates even if it elects to taper bond-buying monetary stimulus.
The yen gained against the greenback, extending its largest three-day gain since 2010, as the Nikkei 225 Stock Average entered a bear market, spurring demand for less-risky assets. The greenback fell even as U.S. retail sales rose more than forecast in May. The euro rose versus the dollar for a fourth day as European Central Bank Executive Board member Yves Mersch expressed uncertainty about employing negative interest rates.
"The market got ahead of itself in early June, looking for ECB interest rate cuts and U.S. Fed tapering," said Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York. "This continues to be supportive for the euro-dollar, and negative for the Dollar Index."
The yen gained 0.7 percent to 95.37 per dollar at 5:02 p.m. in New York, after appreciating to the strongest level since April 3. The currency’s 3.5 percent three-day advance was the biggest since May 2010. The yen added 0.4 percent to 127.56 per euro. The euro rose 0.3 percent $1.3375, after climbing to the highest since Feb. 13.
The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, fell 0.3 percent to 80.674 after reaching the lowest level since Feb. 19.
The measure extended its a loss after the Wall Street Journal reported that the Fed may push back on expectations of a rate increase. It briefly rebounded earlier today after retail sales in the U.S. rose 0.6 percent, exceeding the median forecast of 0.4 percent from 83 economists surveyed by Bloomberg. The increase was the biggest in three months and followed a 0.1 percent gain in April.
Fed policy makers next meet on June 18-19. Chairman Ben S. Bernanke said on May 22 the central bank could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage-backed securities if the employment outlook shows a sustainable improvement.
The Nikkei fell 6.4 percent to 12,445.38. after touching the gauge’s lowest level since April 4.
"The cause of this yen move has been Nikkei weakness," Dan Dorrow, the head of research at Faros Trading LLC in Stamford, Connecticut, said in a phone interview. "The Nikkei is a measure of the willingness of Japanese investors to take foreign-exchange risk, and its decline has investors seeking safety."
The yen’s 14-day relative strength index against the dollar was at 68.4, approaching the 70 level that some traders see as a signal an asset has risen too far, too fast and may be due to reverse course.
"You are still going to see massive liquidity injections by the BOJ," Larry Kantor, the New York-based head of research at Barclays Plc, said in an interview on Bloomberg Television’s "Lunch Money" with Julie Hyman. "If the dollar-yen keeps going down, I would not be surprised to see some direct currency intervention, just to try to stabilize things and introduce two- way risk to investors."
The JPMorgan Global FX Volatility Index rose to 11.43 percent, the most since June 2012. The gauge has climbed from 7.05 percent in December, which was the lowest since July 2007.
South Africa’s rand rose, rebounding after falling on June 11 to its lowest level in more than four years versus the dollar. The currency climbed 2.6 percent to 9.8479 per dollar.
Returns from foreign-exchange funds are falling as the strategy of borrowing low-yielding currencies to fund investments in higher-yielding assets collapses. The Currency Managers Index dropped to 162.15 on May 31, the lowest since December, while the Deutsche Bank G10 FX Carry Basket slid to the least since October.
Speculation the Fed will reduce stimulus measures is weighing on higher-yielding assets. Emerging markets from Brazil to India have taken steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era of unprecedented liquidity.
The yen rose against most its 16 major peers as Japanese money managers cut their holdings of foreign bonds by 386.9 billion yen and sold a net 221.8 billion yen of overseas stocks in the week ended June 7, according to figures released today by the Ministry of Finance.
"What we’re seeing is a very massive unwinding of Japanese short positions, which were put in place after the announcement of the BOJ’s massive monetary easing," Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. "The BOJ is hesitant to intervene even more at this point because they probably want to save what little ammunition they have left until a more critical time."
One-month implied volatility of the dollar-yen currency pair reached 18.91 percent, the most since March 2011. Currency volumes were "exceptionally high" today, notably in the yen, Citigroup Inc. wrote in its CitiFX Wire note to clients.
The World Bank cut its growth forecast for the global economy this year to 2.2 percent, from a January prediction of 2.4 percent, and slower than last year’s 2.3 percent, it said in a report released yesterday in Washington.
"It’s still a sluggish environment," Robert Sinche, global strategist at Pierpont Securities Holdings LLC, said in an interview on Bloomberg Television’s "Surveillance" with Tom Keene. "China is where there’s uncertainty now because the numbers keep coming in a little bit softer because there’s no stimulus there. That’s a concern for global growth."
--With assistance from Jeff Marshall in New York and Neal Armstrong in London. Editor: Paul Cox, Greg Storey
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